What Is a Tax Refund Loan — and Should You Get One?
If you’re looking for ways to get more cash quickly and know you have a tax refund coming, you might consider getting a tax refund loan. It could help you get the money you need soon, though there would be some costs involved.
Here’s what you need to know about a tax refund loan and how to compare it with other types of loans.
What is a tax refund loan?
Some financial institutions will offer you a short-term loan based on your upcoming tax refund. This is usually referred to as a Refund Advance Loan (RAL). You could also get a Refund Anticipation Check (RAC), which usually occurs when you indicate to your tax preparer that you’ll pay their fees out of your refund. The government then sends your refund as a check to your financial institution who disperses the funds appropriately.
If you decide to get a tax refund loan, your tax preparer or loan agent will review your return, your income and your credit when you e-file your taxes. Based on all of this information they could loan you a portion of the money you’re anticipating to receive back from the government.
Your RAL will then be loaded onto a card or deposited into a bank account. A temporary bank account is set up for your tax refund so that when it arrives, the amount of the RAL and any interest or fees are deducted automatically. You’ll keep whatever is leftover.
Traditional RALs were known for having high interest rates, but today some tax preparers offer them for free as a way to entice customers.
- Get access to your funds quickly. If you need money now, a tax refund loan could help you pay for immediate expenses.
- Stay on top of your finances. If you’re accruing interest because of unpaid bills, paying them off with a tax refund loan could save you money.
- Could cost nothing to access your funds now. If your tax preparer is offering an advance on your return free of charge then it could equate to an easy way to get instant cash.
- Prepaid debit card could have fees. If your tax preparer loads the money onto a card, there might be fees associated with using the card that you should be aware of.
- Could cost money in interest or fees. Make sure you learn exactly what this loan will cost you and if the lender is charging interest on the advance.
- You could end up with less money than anticipated. If your tax preparer has miscalculated, or if the IRS holds any of your return due to a tax lien, you could receive less money than you expected but you’d still be responsible for repaying the full amount of the loan.
Should you get a tax refund loan?
There are some cases when a tax refund loan might be your best option:
- If you need money in an emergency. If you have no other way of getting money and need it immediately a tax refund loan could be a way to avoid other forms of bad debt.
- If it won’t cost you anything. If there are no fees or interest involved in getting the loan, then it might make sense to access your funds now.
- If it would cost you more to wait for the money. If you’re paying high interest rates on debt now and need your tax return to get out of debt, using a loan to clear the debt quickly could save you cash.
In other cases, it could be best to wait for your actual tax return to arrive:
- If you’d otherwise prepare your own taxes. It does cost money to have a tax preparer do your taxes, which you’ll need to do in order for them to loan you money on your return. If you don’t need the cash now and this is the only reason you’re paying a preparer, it might make more sense to do them yourself and wait for the return.
- If you can afford to wait for the cash. If you don’t need the cash in a hurry it could be easiest just to wait for your return.
- If you have a federal tax lien or owe child support. If you expect there’s a reason the IRS might withhold some of your return, then you should probably wait for the total funds to arrive instead of taking out a loan based on a return that might not materialize.
- If you need more cash than your expected return. If you’re looking for a larger loan a tax refund loan is probably not the right option for you and you might want to consider a personal loan instead.
Alternative options to tax refund loans
If you’re looking for ways to get money now, you don’t need to rely solely on an advance on your tax refund. Here are some other options:
- Payday alternative loan (PAL): Credit unions are legally allowed to give federally regulated PALs that could help you get access to small dollar amounts quickly. If you don’t need a lot of money and you’re looking for a short term loan, a credit union could have a lower interest rate. Keep in mind that a PAL is not a payday loan, though it does have a short repayment than a traditional personal loan. Payday loans come with exceptionally high interest rates that can make repayment difficult.
- Personal loan: If you need more money than what’s on your expected tax return, it could make sense to borrow funds using a personal loan. Compare products online to make sure you’re getting your best APR and terms.
- Low-interest credit card: Depending on your credit, you could qualify for a credit card with an introductory rate as low as 0% APR. If you pay off your balance on a no-interest credit card before the promotional period expires, you won’t owe anything in interest.
There are situations where a tax refund loan could help you access the money you need immediately, with few negative consequences. But if you’re going to get one, make sure you’re aware of all the fees or interest you’d pay. Also, consider other options that might suit you better.